In Scandal’s Wake, McKinsey Seeks Culture Shift

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Dominic Barton, global managing director of McKinsey & Company, the corporate consulting firm. After a prominent partner was arrested on insider trading charges, Mr. Barton pushed to establish stricter rules on investing and accountability within the firm.CreditCreditChester Higgins Jr./The New York Times

By Anita Raghavan

Jan. 11, 2014

Dominic Barton is 51 years old, 6 feet 4 and silver-haired, yet he has the countenance of a choirboy. Born in Uganda, he is the son of a missionary and a nurse, both Canadians. But it could be said that the society to which he really belongs is that of McKinsey & Company.

For a quarter of a century, except for a brief stint as a currency analyst at Rothschild, Mr. Barton has worked at McKinsey, the consulting firm with more than 1,400 partners and 18,500 employees around the world. And that is why he is facing the most daunting task of his career: as McKinsey’s global managing director, he is trying to change the culture of the firm that shaped him.

There are two reasons that Mr. Barton is on this mission: Anil Kumar and Rajat K. Gupta. Mr. Kumar was a McKinsey director who, in 2010, pleaded guilty to insider trading charges and publicly acknowledged giving corporate secrets gleaned on the job to Raj Rajaratnam, a founder of the Galleon Group hedge fund, in return for cash. Never in the history of the firm had a partner been charged with violating securities laws.

A year after the Kumar scandal, the Securities and Exchange Commission filed a civil complaint accusing Mr. Gupta, a Goldman Sachs board member and former McKinsey managing director, of telling Mr. Rajaratnam about a $5 billion investment in Goldman by Warren E. Buffett’s Berkshire Hathaway at the height of the financial crisis. Mr. Gupta, a revered former partner who had been elected managing director three times in a row, serving at the helm for a decade, was ultimately convicted of criminal charges of leaking boardroom business. He awaits the outcome of his appeal, even as insider trading charges continue to occupy prosecutors. The trial of Mathew Martoma, a former trader at SAC Capital Advisors, run by Steven A. Cohen, started last week in Manhattan, not long after another SAC trader, Michael S. Steinberg, was convicted of trading on corporate secrets. SAC itself pleaded guilty in November to violating insider trading laws.

At McKinsey, Mr. Barton has been trying to prevent another disgrace: a “third man,” as some have put it. McKinsey is known for what it calls its culture based on values and trust — a culture that was created and nurtured by Marvin Bower, its longtime managing director. The values that Mr. Bower instilled included putting the clients’ interests above the firm’s, providing independent advice and keeping confidences. These ideas were imparted from one generation to the next, mentor to apprentice. But after Mr. Kumar’s arrest in late 2009, Mr. Barton, who had been elected to head the firm just months earlier, decided that the honor-driven, values-based system was not enough. What the firm needed was some rules.

“We needed more safety moats around the castle,” he says. “We have this values/trust culture. I get that. Now we have a little more edge.”

Mr. Barton’s rule making has not gone over well with everyone in the firm; he has been criticized as imposing American standards that don’t work globally and accused of operating a “nanny state.” Nonetheless, he has gained the support of most of the firm and, just as important, of the powerful network of alumni, many of whom now populate the Fortune 1,000 companies that McKinsey serves.

“There were a lot of people who were mad about what happened and that it happened at the highest echelons of the firm,” says Partha Bose, a former partner at McKinsey. “Dominic didn’t push the problems under the carpet. Instead, he dealt with it in an open, collegial way from the youngest partner who asked, ‘What have I gotten myself into?’ to the senior-most partner who said, ‘I can’t believe this is happening.’ ”

Rumblings Among Partners

One morning last fall, Mr. Barton sat in his London office overlooking Piccadilly Circus and discussed the efforts he had made to bring the firm to account. He sat across an ebony table — actually an antique Chinese door — and was surrounded by photographs of his family and Asian dignitaries. Mr. Barton spent 12 years in two Asian countries; his wife, Sheila Labatt, of the Labatt brewing family, is a glass artist who studied her craft in China.

To be a McKinsey partner is to be a global citizen. The firm, now 87 years old, had $7 billion in revenue in 2013 and advises everyone from chief executives to heads of state. It was that history and reputation that Mr. Barton felt the need to protect after Mr. Kumar’s arrest.

“I want to retain the heritage of the values-driven, trust-based partnership culture,” he told me. “But I feel we have to modernize and strengthen it by using some of the cutting-edge technologies and behavioral techniques out there.”

One of the first initiatives he championed in 2010 met with stiff resistance from some of McKinsey’s top partners. A new personal investment policy would prohibit employees of the firm and members of their households from trading in securities of any of the firm’s clients. It would also require consultants, regardless of rank, to complete online tutorials on sensitive subjects like investing.

McKinsey’s United States partners, who had seen pictures of Mr. Kumar being paraded in handcuffs, needed little convincing about the need for new policies. But McKinsey’s European partners were angry. In the past, McKinsey consultants were free to trade in stocks of client companies so long as they did not serve those clients personally or have material, nonpublic information about them. Almost as soon as top partners in Europe got wind of the new policies, they began bombarding Mr. Barton with emails and cornering him in the hallways.

“How childish it is that we have to pass a test,” Mr. Barton recalls one colleague saying to him. “Is that what adults do?” Mr. Barton held firm, but says that the partner didn’t back down, either, saying: “You are reminding me of what it was like in Eastern Germany when the Stasi was checking.”

Larry Kanarek, McKinsey’s director of professional standards, a position created by Mr. Barton in 2010, said critics had concerns about efficacy and trust. “Is this really going to stop anything? We are not here for show. We are not comfortable voting for something unless you can show me it actually deters bad behavior,” is how Mr. Kanarek characterized their objections.

“And, we have to trust our partners,” he went on. “If we don’t trust a partner, they shouldn’t become or remain a partner.”

The firm’s new policy on personal investments struck some Europeans as not just futile, but also impractical, “a direct consequence of American securities law,” says Frank Mattern, a McKinsey director in Germany, summarizing the view in Europe. In the United States, securities lawyers say, if a person tips a family member on inside information, and the relative is aware it is an insider tip and trades on it, both could be found guilty of insider trading. The law isn’t so clear-cut in many parts of Europe.

“In Europe, as an employer, we can ask an employee to do it but we can’t enforce all aspects of the policy,” Mr. Mattern says. For instance, the firm could not force relatives of its employees in Germany to submit information about their investments for data privacy reasons.

Mr. Barton felt rumblings among the partners. But he has intense resolve underneath a surface of Canadian self-deprecation. Fifteen years ago, when his mentors told him that moving to South Korea would be bad for his career, Mr. Barton ignored them. And during his early days at McKinsey, no one would have pegged him to head the firm. It took three attempts before he made partner — almost unheard-of at this up-or-out organization. The rejection “was fairly public, so it was embarrassing,” Mr. Barton recalls. But he forged ahead, even accepting a request to give a speech at a party celebrating the partnership of a friend who joined after him. It was painful, but he did it.

“I have known Dominic for many years and I have always seen him lead with his sheer personal passion and vision,” Mr. Bose says. “When Dominic speaks, he speaks with such values that you are compelled to follow him.”

This style came into play as Mr. Barton approached the personal-investment debate in 2010. New on the job — he had been managing director for less than a year — he decided to take a gamble. If McKinsey’s top executives were uneasy with the new policy, he would take the temperature of the firm’s rank-and-file partners. No doubt McKinsey’s junior partners were suffering the repercussions of the Kumar scandal more than their more established colleagues who had built tight client relationships over years.

At a meeting in Toronto on March 16, 2010, Mr. Barton unveiled the proposed changes. He told the consultants that in minutes, they would be polled on their BlackBerrys about whether they were for or against the proposal.

“To be honest, I was nervous,” Mr. Barton says. “What if people came back and said no?” Overwhelmingly, the consultants approved the plan. Armed with the results, he raised the new investment policy with the 31-member Shareholders Council, effectively McKinsey’s board, at a meeting at the Trianon Palace Versailles hotel in France. After a brief debate, the proposal passed.

“The new rules are very unusual for the consulting industry," says one executive long affiliated with a rival firm, who spoke on condition of anonymity. Unlike investment banks, which were driven by regulators to put in place personal-investing policies for their employees, consulting firms have not faced the same regulatory pressures. “I think McKinsey is ahead of the industry" in this regard, the executive said.

By the fall of 2011, Mr. Barton was on a personal crusade. He was inspired by a conference of former directors who met at the Waldorf-Astoria in New York that summer and were incensed at the blow to McKinsey’s reputation. “Having all those people, 75 or 80 years old, there and seeing how upset they were, was very powerful for me,” he says now. “It completely intensified my feelings of wanting to protect the firm. I thought, ‘This has to be my No. 1 priority.’ ”

The McKinsey alumni network is closely connected to large companies; they are an important constituency to the firm because they are in a perfect position to recommend it to potential clients.

Mr. Barton approached Mr. Kanarek and a handful of others about making the firm’s disciplinary body more visible. The panel had existed for a decade but operated largely in the shadows, its punishments meted out quietly. Mr. Barton decided to change that. In 2012, he created a stir in the partnership with what came to be called a “public hanging”; he revealed the identity of one director who was let go for what was described as expense misconduct. Then he sent a memo around the firm, cataloging the missteps of other consultants who were rebuked for failing to obtain outside approval of a contractor, for example, or using abusive language with a group of colleagues. (A senior partner was required to apologize for his language.)

An Obligation to Dissent

At McKinsey’s London office last fall, a recently hired associate sat at a computer for an orientation session. The associate worked at McKinsey as a business analyst several years earlier and then left the firm for a nongovernmental organization. During her first stint, she simply signed a form confirming that she understood McKinsey’s investing rules. This time, though, she had to walk through a 45-minute interactive program.

When McKinsey first introduced this tutorial, six employees refused to complete it, saying it was a sign that the firm was turning into a “nanny state.” They left the firm. To push recalcitrant employees to complete the test, McKinsey cuts off their email access until they comply.

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Raj Rajaratnam, the former chief of the Galleon Group, was sentenced to prison for insider trading.CreditLouis Lanzano/Associated Press

The first example that popped up on the associate’s computer terminal involved a fictitious client company called Zaltia, which was developing a new product that would benefit a supplier. A McKinsey consultant learned that Zaltia had found a serious problem in its hot product. Would knowing that prohibit the consultant from trading in Zaltia? Yes, clicked the associate. (She was right. Not only was it inside information, but McKinsey’s policies barred her from trading in the stock of a client as well.) The young associate was less sure if the information would prohibit the consultant from trading in the securities of three rival suppliers. (It would.)

For McKinsey, the most devastating aspect of the insider-trading scandal was that it involved executives who had been at the firm’s highest levels, not lowly consultants or support staff members. In 2011, Mr. Barton introduced an initiative known as the Survey of Inspirational Leadership, providing for a confidential, electronic channel in which subordinates could offer their views on behavior — whether inspirational or not — among senior partners. What was novel about the new initiative was that it was confidential.

McKinsey’s European partners were again uneasy. To some, it cut against a bedrock principle of the firm, which is that dissent is always welcome and always on the record. “The culture of the firm is that you have an obligation to dissent,” says Mr. Mattern, in Germany. “But do we want a tool where rank-and-file employees can spill their views on someone else,” in confidence?

Stefan Matzinger, the co-chairman of McKinsey’s directors’ committee, which evaluates senior partners, says partners worried that the confidential channel would prompt frivolous remarks. “Let’s say you meet a director in the cafeteria and have a negative encounter” and report it, Mr. Matzinger says.

In the end, Mr. Mattern says, the channel has not caused the fissures that some thought it might. Last spring, submissions were overwhelmingly positive; only 8 percent were negative.

One of Mr. Barton’s duties — performed six times a year — is to address the firm’s new hires. Even after the stain on the firm’s reputation, a job at McKinsey is still highly coveted. This year, the firm expects to receive 235,000 applications and hire 2,500 people globally.

Mr. Barton spoke to 30 new hires in the firm’s London office in October. One of the most important jobs of any C.E.O. is to impart a firm’s values, and that was a big part of his presentation. A new recruit asked about Mr. Barton’s own experiences navigating between McKinsey’s values and the firm’s business imperatives. He responded with a story from Korea, when he was put in charge of office finances. One of the firm’s more client-oriented partners had the highest expenses, owing largely to payments for “room salons.” It was common for Korean businessmen to retreat for a third drink to a room salon, where scantily clad women mill about.

“I didn’t know which value it went up against but we figured it was a bunch of them,” Mr. Barton told the new employees. He decided that the firm would not pay for “room salons” and that it didn’t want consultants to frequent them, either.

Mr. Barton’s goal in sessions like this is to encourage consultants to think broadly about ethics rather than dwell on specific examples.

“Why do we think values matter?” he asked the group.

“Sometimes logic fails and values help guide your decision,” one young man offered.

And when values fail, Mr. Barton might have said, at least there are now rules.